Rolls-Royce bullish despite order setbacks
AERO engine manufacturer Rolls-Royce has said its second half outlook remains unchanged despite its recent disappointing performance.
The group’s order book was up £2.8bn to £76.5bn in the first half, although underlying revenue fell 3% to £6.3bn (H1 2014: £6.5bn). Underlying pre-tax profit was down 32% to £439m (H1 2014: £646m).
In the group’s interim results statement chief executive Warren East was in bullish mood, despite the setbacks.
He said: “Despite the disappointment of our recent update, our second half outlook remains positive and full year guidance for revenue, profit and cash issued on July 6 remains unchanged. The continued growth in our order book demonstrates the long-term demand for our innovative products and services, and underpins my confidence in the fundamental strength of our business.”
The gloom surrounding the firm was alleviated slightly earlier this month when it announced a record order from Emirates for its Trent 900 engines. This was the main factor contributing to a 61% increase in order intake and a 4% increase in the order book.
However, the group performance was impacted by a sharp decline in new orders for its Marine business, driven by significant market deterioration in offshore, largely due to the upheaval in the oil & gas sector.
Its Defence and Nuclear businesses were also affected by lower order levels, although the company insisted these markets remained broadly stable.
The interims show underlying group revenue declined 3% in H1 2015 compared to H1 2014. This reflects an 8% decline in revenue from original equipment, partially offset by a 2% increase in services revenue, led by Civil Aerospace. By division, Aerospace revenue increased 2%, whilst Land & Sea revenue declined 12%.
Underlying pre-tax profit declined 32% to £439m (H1 2014: £646m) led by a significant reduction in Civil profit in H1. This was driven in part by the transition to less mature products featuring an increased proportion of ‘unlinked’ accounting, resulting in less upfront profit recognition, and a higher R&D charge. Reduced revenue in Marine and Power Systems also contributed to lower profit in these businesses.
The group’s R&D spending increased 5% over H1 2014, largely reflecting higher investments for the Trent 1000 TEN, Trent 7000 and the Trent XWB-97 aero engine programmes. In addition, capitalisation of R&D declined significantly.
“We expect that both our Trent XWB-97 and Trent 1000 TEN engines will reach a level of maturity where we start to capitalise R&D, possibly by as early as the end of the second half of 2015,” it said.
Headline H1 pre-tax profit was £310m and the company blamed foreign exchange fluctuations for having a bearing on this.
The Emirates deal – the largest ever secured by the group for the Trent 900 engine – together with the TotalCare support service agreement, helped grow the Civil Aerospace order book to £66.4bn, up 5% on 2014 year end.
Underlying Civil Aerospace revenue was up 2% to £4.3bn (H1 2014: £4.2bn); underlying profit before financing charges and tax was down 27% to £432m (H1 2014: £593m).
The company said lower demand for Airbus A330ceo was likely to create second half and 2016 headwinds for Trent 700 deliveries.
In outlook, Warren East added: “In the near term, we are managing a significant transition from mature engines to newer, more fuel efficient ones, such as the Trent XWB, Trent 7000 and Trent 1000. At the same time, we are taking appropriate actions to mitigate the effects of weakness in our offshore marine markets.
“While these create a profit headwind in the near term, it is critical we successfully deliver our product launches, complete our supply chain transformation and sustain investment in our businesses to strengthen their competitive positions. The initial phase of my ongoing operational review has and will continue to concentrate on how we drive improvements and sharpen our focus to make us a more resilient and sustainable business.”
